Market restructuring and pricing in the hospital industry

Regulators are often concerned that merger related increases in market power can adversely affect consumers through higher prices. On the other hand, merging firms usually claim that efficiency and cost reductions are reasons for the mergers. One industry where the market power versus cost reduction effects of mergers is of great current relevance is the U.S. hospital industry. In response to environmental changes, such as, the rise of managed care and declining patient reimbursements, the hospital industry has undergone tremendous restructuring in recent years. Since 1990, over 45% of the U.S. hospitals have been involved in mergers, acquisitions or merger related talks. Several of the recent hospital mergers and acquisitions have resulted in large increases in the market power of the merging hospitals.;In this study I examine whether recent hospital mergers and acquisitions result in an increase in hospital prices. I also analyze the moderating effects of size, for profit/not for profit status of the hospital, case-mix composition, and length of stay on hospital prices.;Mergers and acquisitions that occurred in California, Iowa and Ohio during the period 1994-96 are analyzed. Post-merger pricing strategies are analyzed both at the individual hospital level and at the level of individual services or Diagnosis Related Groups (DRGs) within hospitals. For the DRG level analysis, pre and post-merger prices for a group of services for which the merging hospital gained market power is compared to a control group of services for which the merging hospital did not gain significant market power. Changes in DRG level charges of merging hospitals are also compared with changes in charges for the same DRGs of non-merging hospitals in the same market. The hospital level analysis is conducted by comparing the pre and post-merger prices of merging and acquired hospitals with corresponding prices for non-merging hospitals in the same market.;The general conclusion from this study is that the effects of hospital mergers that occurred in Ohio in 1994-95, and acquisitions which occurred in California in 1994 and 1996 are consistent with market power effects. Merger and acquisition related efficiencies, if any, are not passed on to the consumers in the form of decreased prices. These results are found to hold both at the DRG-level and the hospital level. DRGs for which market-shares increase from a merger show significant increases in charges relative to DRGs whose market-shares are unaffected by the merger, and relative to the increase in charges for the same DRGs in non-merging hospitals. At the hospital-level, the change in revenue per episode and revenue per patient day is higher in merging hospitals compared to non-merging hospitals.;This study has three major contributions. First, it analyzes the impact of mergers and acquisitions using DRG-level markets, which has not been previously used in the literature. Second, it uses a large database covering several states. Finally, it carries out several levels of analyses using different control groups and thus provides robust evidence on the impact of mergers and acquisition on hospital prices.;This study has implications for anti-trust treatment of hospital mergers. The appropriate anti-trust treatment of hospital mergers is currently under debate. Results from this study indicate that market power derived from hospital mergers and acquisitions deserves regulatory attention.